US nuclear vow fails to power uranium

US President Barack Obama’s pledge to triple the amount of loan guarantees for nuclear power stations in the United States to $US54 billion ($61 billion) has done little to strengthen the near-term outlook for uranium prices or uranium equities.

In his State of the Union address this week, Mr Obama made the commitment that US Energy Secretary Steven Chu said could support the construction of up to 10 reactors, contingent on the developers raising their share of capital and any plans being approved by regulators.

Deutsche Bank analyst Paul Young said “it effectively means we could see a renewal of new US reactor applications and approvals, but what that means is we’ll see a number of new reactor approvals from 2015 onwards".

Mr Young said he was modelling eight new nuclear reactor approvals in the US by 2015, although early last year 18 1-gigawatt units were in the permit application phase. Only two of these reactors had been approved and Mr Young said there was a risk this target would not be met despite the proposed increase in loan guarantees.

The US has 104 reactors and is one of the top uranium consumers.

The uranium market is predicted to enter a supply surplus this year and rise for the next two years. This compares with a significant deficit in recent years that resulted in uranium prices peaking at $US138 a pound in 2007, before a sharp pull-back in the following months.

Spot uranium prices are trading at $US42.25 a pound, well below the long-term price of $US60.

Last week
Paladin Energy
managing director John Borshoff and
Energy Resources of Australia
chief executive Rob Atkinson said they believed uranium prices at this level were unsustainable and would not promote exploration or the approval of new projects.

Related Quotes

Company Profile

Mr Borshoff said Paladin believed a long-term price of $US75 to $US85 a pound was appropriate.

Mr Young said Deutsche was forecasting a long-term price of $US65 a pound this year but it was difficult to see what would drive uranium prices this year.

“We don’t see a lot of upside considering the production increase from Kazakhstan, selling from the US Department of Energy and the preference of US utilities to now buy on spot as opposed to term," he said.

In the medium-term, China looms as the demand swing factor.

Mr Borshoff and Mr Atkinson reported strong demand from China and in the coming weeks Paladin expects to makes its first trial shipment to a Chinese group.

China has plans to build 40GW of capacity by 2020, costing about $US120 billion, but Deutsche says China could possibly end up with double this figure.

From an equities perspective, the flat year for uranium prices does not translate to a positive view on the sector.

Australia’s largest producer, ERA, has warned of a difficult year in 2010 after a strong performance in 2009. The company has planned maintenance and capital spending commitments this year, so is not expected to repeat a near-record output in 2009.

Goldman Sachs JBWere and Macquarie Group have “sell" or “underperform" ratings on the stock, with price targets of $20.84 and $19.50, respectively. Deutsche has a “hold" rating on the stock, which closed 18¢ lower at $19.92 yesterday.

Paladin’s second mine, Kayelekera in Malawi, has disappointed in the speed of its ramp-up. However, Mr Borshoff has said it will reach its design capacity of 3.3 million pounds a year by the end of March.

Macquarie has an “outperform" rating on the stock with a share price target of $4.50, while UBS rates it as “neutral" with a $4.20 target. The stock closed 1¢ higher at $3.79 yesterday.

Outside of the producers, analysts rate
Extract Resources
and
Mantra Resources
as the groups with the most potential.

Extract has made a “tier one" discovery south of Rio Tinto’s Rossing mine in Namibia and is assessing the introduction of a partner to help in its development. A mine at Rossing South could produce 14.8 million pounds of uranium a year at a cash cost of $US23.60 a pound, according to Deutsche.

Perth-based Mantra is expecting to complete a pre-feasibility study for its Mkuju River uranium project in Tanzania by the end of March after upgrading the resource at the project to 84.3 million pounds last week. Analysts believe the project could contain about 140 million pounds of uranium.